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Consumers to see stable non-mortgage interest rates in 2014

Mortgage rates are likely to rise in 2014, but recent Federal Reserve actions to curtail bond purchases are not likely to result in higher across-the-board interest rates for consumers.

In short order, the private markets have acted on the Federal Reserves’ recent move to start tapering and have raised long-term rates sharply in recent weeks, and further steepened the yield curve.

“As for interest rates, our view is that while the Fed can target short-term interest rates by setting the Fed funds rates, longer-term U.S. Treasury and private market rates will drift up in 2014,” notes John Silvia, chief economist with Wells Fargo Securities.

Bond yields have risen between 0.93% and 0.85% since May, on corporate debt rated Aaa to Baa, respectively. Silvia notes that the bond markets have at least partially priced in the Fed’s move to taper quantitative easing.

“In 2014, we expect long-term rates to exhibit an upward bias as Fed tapering moves forward. As for credit markets, while easy monetary policy may provide some support to the aggregate economy, the current Fed policy is clearly altering asset prices at the sector level,” Silvia said.

HIGHER MORTGAGE RATES
Mortgage interest rates are those most likely to rise in 2014, according to Greg McBride, chief market economist for Bankrate.com.

McBride said tied to the 10-year Treasury rates, longer term mortgages (30 years) are sitting at 4.7%, and likely to hit 5% in the first half of 2014, escalating to 5.5% by the year’s end.

He said while the new Federal Reserve Chief Janet Yellen is expected to continue the policy of keeping mortgage rates low by buying blocks of mortgage-backed securities, the Fed’s bond-buying taper will push rates higher and make homes more expensive to finance.

“Historically speaking, 30-year mortgage rates have averaged 7.5% over the past four decades, so even at 5.5% the rate remains quite low, albeit much higher than seen in the past two and a half years,” McBride told The City Wire.

AUTO LOANS
Ample subprime lending activity will likely continue to fuel growth in the auto sector in 2014, according to economists. That growth will likely see no significant change in auto loan interest rates through 2015.

Edmunds.com predicts that the auto industry is on pace to reach its highest annual sales performance in 2014 since shoppers bought 16.5 million new cars in 2006.

"The average age of all light vehicles on the road climbed to 11.4 years in 2013, and an aging fleet will continue to force buyers back to the market in 2014," Edmunds.com Chief Economist Dr. Lacey Plache said in a statement. "With used car prices still elevated over past norms and used car supply still tight, the new car market will remain attractive to many of these buyers."

Plache expects the auto sales environment in 2014 will closely resemble the environment in 2013 — 15.5 million sales.

Even though the auto industry is expected to post a 6% sales growth in 2014, Plache said economic recovery remains tepid for several large groups hardest hit by the recession — young people, lower income households and small businesses.

"Even though auto sales from these groups have improved from recession lows, their participation in the recovery still lags the rest of the market." Plache said.

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CONSUMER RATES
McBride said consumer interest rates on credit cards should hold steady, and investors relying on short term CD rates will not see any measurable rise in their earnings this year because the Fed plans to keep a lid on shorter term rates through 2015.

“This could be the last hurrah for these low, low rates and a good time for consumers to pay down credit card balances and eliminate those home equity loans and other variable interest debt they have acquired in recent years,” McBride said.

Despite stagnant income levels in recent years, McBride said consumers on the whole have shored up their personal balance sheets and are reporting the lowest debt-to-income ratios in 30 years.